• (a) The carrying amount of goodwill allocated to the unit.

• (b) The carrying amount of intangible assets with indefinite useful lives allocated to the unit.

• (c) The basis on which the unit's recoverable amount has been determined (value in use or net selling price).

• (d) The amount by which the unit's recoverable amount exceeds its carrying amount. If the entity determines a range of values for the unit's recoverable amount and does not proceed to agree a single value within that range because the lowest value exceeds the unit's carrying amount, that fact shall be disclosed together with the range of amounts by which the recoverable amount values exceed the unit's carrying amount.

• (e) If the unit's recoverable amount is based on value in use:
  — A description of each key assumption on which management has based its cash flow projections for the period covered by the most recent budgets/forecasts. Key assumptions are those to which the unit's recoverable amount is most sensitive.
  — A description of management's approach to determining the value(s) assigned to each key assumption, whether those value(s) reflect past experience and/or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience and/or external sources of information.
  — The period over which management has projected cash flows based on financial budgets/forecasts approved by management and, when a period used for a cash-generating unit, an explanation of why that longer period is justified. — The growth rate(s) used to extrapolate cash flow projections beyond the period covered by the most recent budgets/forecasts, and the justification for using any growth rate that exceeds the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market to which the unit is dedicated.
  — The discount rate(s) applied to the cash flow projections.

• (f) If the unit's recoverable amount is based on net selling price, the methodology used to determine net selling price. If net selling price is not determined using an observable market price for the unit, the following information shall also be disclosed:
  — A description of each key assumption on which management has based its determination of net selling price. Key assumptions are those to which the unit's recoverable amount is most sensitive.
  — A description of management's approach to determining the value(s) assigned to each key assumption, whether those value(s) reflect past experience and/or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience and/or external sources of information.

• (a) The aggregate carrying amount of goodwill or indefinite life intangible assets allocated to those units.
• (b) The number of those units.

• (a) The aggregate carrying amount of goodwill allocated to those units.
• (b) The aggregate carrying amount of intangible assets with indefinite useful lives allocated to those units.
• (c) A description of the key assumption(s).
• (d) A description of management's approach to determining the value(s) assigned to the key assumption(s), whether those value(s) reflect past experience and/or, if appropriate, are consistent with external sources of information, and, if not, how and why they differ from past experience and/or external sources of information.

• (a) The value assigned to each key assumption on which management has based its cash flow projections or its determination of net selling price.
• (b) The amount by which the value assigned to each key assumption must change, after incorporating any consequential effects of that change on the other variables used to measure recoverable amount, in order for the unit's recoverable amount to be equal to its carrying amount.
• (c) The change in the growth rate used to extrapolate cash flow projections beyond the period covered by the most recent budgets/forecasts that would cause the recoverable amount of the unit to be equal to its carrying amount.

The Board discussed the transitional provisions of the draft standard and agreed that the requirements should be applied prospectively from the effective date of the standard and that retrospective application would be permitted provided the necessary information was obtained at the time of the combination and that the retrospective impairment tests could be performed. It was noted that the draft standard would be effective for all combinations after it is issued.

The staff proposed that goodwill previously written off directly to equity would not be recycled to the income statement. The Board agreed.

The staff proposed adding undue cost and effort exemptions together with disclosures of this fact and explanations of why this is the case for paragraphs 66(f), 66(i), 69 and 70. The Board agreed.

The staff proposed amending paragraph 67 of IAS 12 as follows:

"As a result of a business combination, an acquirer may consider it probable that it will recover its own deferred tax asset that was not recognised prior to the business combination. For example, the acquirer may be able to utilise the benefit of its unused tax losses against the future taxable profit of the acquiree. In such cases, the acquirer recognises a deferred tax asset, but does not include it as part of the accounting for the business combination, and therefore does not take into account in determining the goodwill or the amount of any excess over the cost of the combination of the acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities."

The Board agreed.

The Board agreed that any goodwill impaired in an associate would be reversed prior to determining the investor's share of profit. The investor would then test the investment in the associate for impairment.

Discussion at the IASB's November 2003 Meeting

Definition of Joint Control

In June 2003, the Board considered whether to modify the amendments it proposed in ED 3 to the definitions of joint control in IAS 28, Accounting for Investments in Associates, and in IAS 31, Financial Reporting of Interests in Joint Ventures. The Board noted that the definition proposed in ED 3 might be too narrow because it could be viewed as suggesting that a joint venture exists only when unanimous consent is required for all financial and operating decisions. On the other hand, the current definition may make it easier for an entity to structure a business combination as a joint venture to circumvent the proposals in ED 3, Business Combinations.

The Board considered the definition joint control from a G4+1 paper:

Joint control over an enterprise exists when no one party alone has the power to control its strategic operating, investing, and financing decisions, but two or more parties together can do so, and each of the parties sharing control (joint venturers) must consent.

The Board noted that based on the current definitions in IAS 31 of 'joint venture' and 'joint control', a business combination would be excluded from the scope of the IFRS resulting from ED 3, and therefore from the purchase method requirement, only if that combination results in the formation of reporting entity over which the owners of the combining entities or operations contractually agree to share control such that no single party is in a position to control the activities of the reporting entity.

The G4+1 definition of joint control differs from the existing IAS 31 definition in three respects:

• The G4+1 definition reflects the view that joint control can sometimes exist without a contract or even an explicit agreement.
• The IAS 31 definition applies broadly to economic activities while the G4+1 definition refers to enterprises.
• The G4+1 definition contemplates unanimous consent to strategic operating, investing and financing decisions while IAS 31 allows for the possibility that some such decisions might require only a majority of the venturers.

The staff recommended that the Board retain the existing definition of joint control in IAS 28 and IAS 31 and the related commentary in paragraph 6 of IAS 31, pending a more fundamental review of those Standards.

Some Board members expressed concern that not including a 'unanimous' criterion could lead to a combination being effectively accounted for as a pooling of interests. It was agreed to include this criterion in respect of the venturers and not any other shareholders.

Subsequent Measurement of Contingent Liabilities

ED 3 proposed that:

• Contingent liabilities recognised as part of allocating the cost of a combination should be measured after initial recognition at fair value, with changes in fair value recognised in profit or loss.
• The acquirer should measure the fair value of a contingent liability as the amount that a third party would charge to assume that contingent liability. Such an amount should reflect all expectations about possible cash flows and not the single most likely or the expected maximum or minimum cash flow.

The Board agreed to clarify that this requirement did not apply to certain items as follows:

The requirement in paragraph 46 does not apply to the following items assumed in a business combination:

• Financial instruments within the scope of IAS 39.
• Financial guarantees excluded from the scope of IAS 39 and required to be accounted for under IAS 37 as set out in paragraph 2(f)of IAS 39.
• Commitments to provide loans at below-market interest rates and required to be accounted for under paragraph 2(i)of IAS 39.

The staff recommended that the Board proceed with the proposal in paragraph 46 of ED 3 that contingent liabilities recognised as part of allocating the cost of a combination be measured after initial recognition at fair value, with changes in fair value recognised in profit or loss.

Some Board members had previously noted that this proposal is inconsistent with the accounting for financial guarantees under the proposed improvements to IAS 39, Financial Instruments: Recognition and Measurement, and suggested that contingent liabilities should be subsequently measured at the higher of their initially recognised amount or their value determined in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets.

As there was uncertainty as to the future accounting under Phase II it was agreed to use the latter in the Phase I standard. This would not apply to contracts accounted for under IAS 39.

Measuring Value in Use

Where the price paid for the unit (part of the acquired entity) was based on projections that included a major restructuring expected to result in a substantial increase in the net cash inflows derived from the unit and there is no observable market from which to estimate the unit's net selling price, there is some concern that if the net cash inflows arising from the restructuring are not reflected in the unit's value in use, comparison of the unit's recoverable amount and carrying amount immediately after the acquisition will result in the recognition of an impairment loss.

Although the Board acknowledged the problem, they did not believe it could be adequately addressed at the moment. They concluded that the Basis for Conclusions should note that the best evidence of net selling price is the past transaction.

The second issue relates to an asset or unit that has been held for some time, but which the entity plans to abandon as part of a restructuring. The issue arises because of what some believe is a conflict (more precisely, a timing conflict) between the requirements in paragraphs 27(b)and 37 of IAS 36, Impairment of Assets. If a planned restructuring includes plans to abandon an asset or unit and the effects of that planned restructuring have been reflected in the financial budgets approved by management, but they have not yet met the criteria in IAS 37 Provisions, Contingent Liabilities and Contingent Assets for recognition as a liability, at issue is whether the value in use of the asset or unit:

a. should reflect the effects of the restructuring, which would give rise to an immediate impairment loss for the asset or unit; or

b. should reflect the continuing use of the asset or unit until the entity is committed to the restructuring. This would result in the impairment loss for the asset or unit being recognised at the same time as any restructuring provision is recognised under IAS 37.

The staff recommended that paragraph 27(b) be reworded as follows:

"Cash flow projections shall be based on the most recent financial budgets/forecasts that have been approved by excluding any estimated future cash inflows or outflows expected to arise from future restructurings or capital expenditure as described in paragraph 37. Projections based on these budgets/forecasts shall cover a maximum period of five years, unless a longer period can be justified; and...."

Measuring Value in Use Using Pre-Tax Cash Flows and Discount Rates

In July the Board considered respondents' and field visit participants' concerns regarding the requirement in IAS 36 to use pre-tax cash flows and pre-tax discount rates when measuring value in use. Many participants and respondents stated that using pre-tax cash flows and pre-tax discount rates will represent a significant implementation issue for companies because typically a company's accounting, corporate finance, planning/budgeting, and strategic decision making systems are fully integrated and use post-tax cash flows and post-tax discount rates to arrive at present value measures. The participants and respondents believe that the IAS 36 requirement to use pre-tax cash flows and pre-tax discount rates would prevent companies from integrating the value in use calculations with their existing internal management systems, and instead would oblige them to develop additional 'pre-tax' systems, separate from their existing integrated 'post-tax' systems. Although IAS 36 currently requires the use of pre-tax cash flows and pre-tax discount rates, the companies believe this issue is exacerbated by the proposal for the recoverable amount of cash-generating units containing goodwill and/or intangible assets with indefinite useful lives to be calculated at least annually.

The staff recommended that no amendments be made at this time to the requirement in IAS 36 to use pre-tax cash flows and pre-tax discount rates when measuring value in use. Any decision on the treatment of tax in value in use calculations should be considered as part of the conceptual project on measurement.

The Board agreed, and also agreed to include a discussion of the different ways this can be achieved in the Basis for Conclusions.

Treatment of Forward Contracts in a Business Combination

During the pre-ballot process for IAS 39, one Board member suggested that when an acquirer and vendor in a business combination agree the cost of the combination before the acquisition date (that is, before the date the acquirer obtains control of the acquiree), a forward contract arises that, in theory, should be accounted for under IAS 39, Financial Instruments: Recognition and Measurement. Board members considered this issue and agreed that it should not be dealt with as part of the Financial Instruments project. Instead, the issue should be considered by the Board in finalising Phase I of the Business Combinations project.

The staff recommended that the following amendment be added to the scope of IAS 39:

This Standard shall be applied by all entities to all types of financial instruments except:

"g. contracts between an acquirer and a vendor in a business combination to buy or sell an acquiree at a future date."

A number of Board members expressed concern that this could be abused in other areas. Others believed that the reference to a business combination provided the necessary limitation. The Board agreed with the staff (11-3).

The Definition of an 'Operation'

The Board considered additional guidance on identifying when an entity or a group of assets or net assets constitutes an 'operation'. The staff recommended that the references to 'operations' should be replaced with references to 'business' and the term 'business' should be defined.

The staff proposed the following definition and related guidance:

Definition

A business is an integrated set of activities and assets conducted and managed for the purpose of providing:

a. a return to investors; or

b. lower costs or other economic benefits directly and proportionately to policyholders or participants.

A business generally consists of (a) inputs, (b) processes applied to those inputs, and (c) resulting outputs that are, or will be, used to generate revenues.

Guidance

The elements of a business will vary by industry and by how an entity structures its operations, but would normally include the following:

Inputs

Long-lived assets, including intangible assets, or rights to the use of long-lived assets.

Intellectual property.

The ability to obtain access to necessary materials or rights.

Employees.

Processes

The existence of systems, standards, protocols, conventions, and rules that act to define the processes necessary for normal operations, such as (i) strategic management processes,(ii) operational processes, and (iii) resource management processes.

Outputs

The ability to obtain access to the customers that purchase, or will purchase, the outputs of the transferred set.

If goodwill is present in a transferred set of activities and assets, the transferred set shall be presumed to be a business.

The assessment of whether a transferred set is a business shall be made without regard to how the transferee intends to use the transferred set. In other words, it is not relevant to the evaluation of whether the transferred set is a business whether the transferee will actually operate the set on a stand-alone basis or intends to continue using the transferred set in the same manner as the transferor.

The staff further proposed to relocate paragraph 14 of ED 3 to the beginning of the section in ED 3 titled 'Identifying a Business Combination' and amend it as follows:

The result of nearly all business combinations is that one entity, the acquirer, obtains control of one or more other businesses, the acquiree. If an entity obtains control of one or more other entities that are not businesses, the bringing together of those entities is not a business combination.

The Board agreed to incorporate the definition into the standard and include the presumption that if goodwill is present in a transferred set of activities and assets, the transferred set shall be presumed to be a business.

The staff indicated they would be proceeding with a pre-ballot draft of the three standards.

Three Board members indicated they would be dissenting to the package of standards.

Discussion at December 2003 IASB Meeting

The Board considered an issue that arose during the drafting of the pre-ballot version of the IFRS on business combinations. The issue relates the Board's decision that the IFRS should not apply to the accounting for the following transactions until guidance on the application of the purchase method to those transactions has been issued by the Board. These transactions are:

• business combinations involving two or more mutual entities; and
• business combinations in which separate entities or businesses are brought together to form a reporting entity by contract only without the obtaining of an ownership interest (for example, combinations in which separate entities are brought together by contract only to form a dual-listed corporation).

The staff proposed that the reference to these transactions being accounted for under IAS 22 be removed, the scope exemption under "IFRS 3"be retained, and the entity be consequently required to select appropriate accounting policies under the guidance in IAS 8.

The Board agreed with removing the reference to IAS 22 and withdrawing it completely. However, they agreed to scope these entities into "IFRS 3" except for goodwill (vote 13-1). The Board agreed that this should be exposed. It was noted that initially these entities would be scoped out of "IFRS 3", which could be amended subject to the results of the exposure draft, but IAS 22 would be withdrawn.

Discussed at the January 2004 IASB Meeting

Intangible Assets

The Board considered removing the current requirement on residual values on intangible assets with a finite life. This was suggested because:

• The requirement for the residual value of an intangible asset to be assumed to be zero was initially included in IAS 38 as a means of preventing entities from circumventing the requirement to amortise all intangible assets. For example, by claiming that the residual value of an intangible asset was equal to or greater than the asset's carrying amount, an entity could avoid amortising the intangible asset because its depreciable amount would be nil.
• This rationale will not be relevant under the revised version of IAS 38, given that intangible assets with indefinite useful lives will not be amortised.
• It is reasonably plausible that an intangible asset, such as software, might be sold before the end of its economic life. In such cases, its residual value, as defined in IAS 38, would not be zero irrespective of whether the current conditions are met.

The staff noted that they did not disagree with the above analysis but believed the change would require re-exposure and recommended that the Board do not change the requirement. The Board agreed.

The Board previously agreed to include guidance on measuring the fair value of an intangible asset. It was noted that if the fair value of an intangible asset acquired in a business combination cannot be measured reliably, it is not recognised separately from goodwill. It has been suggested that:

• If the fair values of complementary assets cannot be individually determined, an entity should be required to recognise, rather than not precluded from recognising, those complimentary assets as a single asset, so as to ensure such assets are not inappropriately subsumed within goodwill.
• The requirement for the complimentary assets to have similar useful lives should be removed. As noted above, although some intangible assets are so closely related to other identifiable assets or liabilities that they are usually sold as a package, it would still be possible to measure reliably the fair value of that package. If the requirement for similar useful lives is not met, the fair value of that package would be subsumed in goodwill. Board members have suggested that more useful information is provided if the package is recognised separately from goodwill.

The staff proposed that the guidance be changed to:

• (a) an intangible asset acquired in a business combination might be separable, but only together with a related tangible or intangible asset. For example, a magazine's publishing title might not be able to be sold separately from a related subscriber database, or a trademark for natural spring water might relate to a particular spring and could not be sold separately from the spring. In such cases, the acquirer recognises the complementary assets as a single asset separately from goodwill if the individual fair values of the complementary assets are not reliably measurable.
• (b) similarly, the terms 'brand' and 'brand name' are often used as synonyms for trademarks and other marks. However, the former are general marketing terms that are typically used to refer to a group of complementary assets such as a trademark (or service mark) and its related trade name, formulas, recipes, and technological expertise. The acquirer recognises as a single asset a group of complementary intangible assets commonly referred to as a brand if the individual fair values of the complementary assets are not reliably measurable. If the individual fair values of the complementary assets are reliably measurable, an acquirer is not precluded from recognising them as a single asset, provided the assets that make up that the group have similar useful lives.

The Board agreed subject to some wording changes (for instance, "complementary" would be changed to "package").

Business Combinations

The Board agreed to include an amended objective paragraph.

The Board considered the proposed requirements when an entity uses provisional values. The staff recommended that this be amended to require restatement of prior reported numbers when the values are finalised. It was noted that the Basis for Conclusions should reflect that this is not an error.

The Board discussed the requirement to not recycle goodwill previously written off against equity. The Board agreed not to change the current proposal.

Impairment

The Board previously decided that if the initial allocation of goodwill acquired in a business combination could not be completed before the end of the annual period in which the business combination is effected, that initial allocation should be completed before the end of the first annual period beginning after the acquisition date. It was queried why this was different to the time required to finalise asset values.

The Board agreed not to change the requirement but to include an explanation as to the differing requirements in the Basis for Conclusions.

As part of the Board's recent improvements to IAS 16, Property, Plant and Equipment, IAS 36 was consequentially amended to require the future cash flows used in measuring an asset's value in use to exclude estimated future cash inflows or outflows expected to arise from future costs to add to, replace part of, or service the asset. However, IAS 36 was also consequentially amended to require estimates of future cash flows to include future costs necessary for the 'day-to-day servicing of the asset.

The staff recommended that, for consistency with IAS 16, IAS 36 continue to require estimates of future cash flows for measuring an asset's value in use to include future costs necessary for the day-to-day servicing of the asset.

However, the staff also recommended that, for consistency with IAS 16, the requirement for the estimates of future cash flows to exclude 'costs to service the asset' be amended to require the estimates to exclude 'costs for major inspections'.

The Board agreed.

The Board considered whether the description as to the level at which goodwill is tested for impairment, together with the additional guidance, properly convey the Board's intention on this issue.

The staff believed that the wording used properly conveyed the Board's intention on the level of the goodwill impairment test and recommended that no changes be made.

The Board agreed subject to some wording changes.

The Board discussed the measurement of the recoverable amount of a cash generating unit when the price paid for the CGU is based on projections that include major restructuring costs (which must be excluded from the recoverable amount calculation). The Board was concerned that the current wording in the Exposure Draft would require the recognition of an immediate loss. The Board intends to clarify that a recent price paid for a CGU is likely to be the best source of its fair value to avoid recognition of this immediate loss.

Discussion at the February 2004 IASB Meeting

The Board discussed an issue as to the proposed wording that specifies adjustments should be made to an associates' profit or loss in recording the investors' equity accounted earnings in respect of goodwill but does not specify adjustments in respect of other business combination type adjustments. The Board agreed to clarify the wording.

The Board discussed a further issue that arose as a result of consequential amendments from IAS 16 that could result in an interpretation that in determining cash flows in an impairment test, the cash flows could be limited to the period of the shortest component separated out by IAS 16. The Board agreed to clarify the issue in the short-term but agreed that the issue would need to be addressed in more detail in the future.

Discussion at the March 2004 IASB Meeting

The IASB plans to issue IFRS 3 Business Combinations on or around 31 March 2004. In addition, the IASB intends to issue a limited exposure draft on certain issues related to difficulties arising in phase I. This exposure draft is separate from Phase II -- applying the purchase method -- for which an exposure draft is also expected in 2004.

IFRS 3 will include a requirement to measure the cost of a business combination at the net fair value of the acquiree's identifiable assets, liabilities, and contingent liabilities when (a) the acquirer and acquiree are both mutual entities or (b) the business combination is effected through contract alone without obtaining ownership interest at the transaction date. The staff recommended and the IASB agreed that these transactions be measured at the net fair value of the acquiree when no readily measurable consideration is exchanged to effect the combination.

Related to the limited exposure draft, the Board discussed costs attributable to a business combination. The staff recommended and the Board agreed (7-5-1) that when the cost of a business combination is measured as the net fair value of the acquiree's identifiable assets, liabilities, and contingent liabilities, that cost should not include costs directly attributable to the combination. Those costs should be recognised immediately in profit or loss.

The Board concluded that the transition and effective date of the exposure draft should be the same as IFRS 3. The exposure draft will have a 90 day comment period.

Exposure Draft on IFRS 3 Scope Amendments

On 29 April 2004 the IASB issued an exposure draft: Proposed Amendments to IFRS 3 Business Combinations: Combinations by Contract Alone or Involving Mutual Entities. The amendments would add to the scope IFRS 3:

• Combinations in which separate entities are brought together to form a reporting entity by contract alone without the obtaining of an ownership interest; and
• Business combinations involving mutual entities.

Both were excluded from IFRS 3 when it was issued last month. Including these transactions in IFRS 3 would mean that an acquirer must be identified and the acquirer must account for the combination using the purchase method. The exposure draft would not change the IFRS 3 scope exclusion for combinations involving entities under common control. If finalised, the proposal would be applied to business combinations agreed to on or after 31 March 2004 (same as IFRS 3). The IASB has asked for comments by 31 July 2004. Click for IASB Press Release (PDF 33k).

Discussion at the September 2004 IASB Meeting

In April 2004, the IASB published an Exposure Draft of Proposed Amendments to IFRS 3 Business Combinations – Combinations by Contract Alone or Involving Mutual Entities. The comment period closed 31 July 2004. 75 comment letters were received.

Staff presented a summary of the comment letters. The majority of respondents said that they disagreed with the Board. The various reasons for this where discussed at length. The Board agreed to proceed as follows:

• Not to finalise the ED of proposed amendments, but rather deal with the issues in Phase II of the business combinations project.
• Clarify that IAS 22 does not apply to business combinations that may be achieved by contract alone or involving mutual entities because that standard has been superseded and, therefore, is not within the IAS 8 hierarchy. This point was made to highlight that pooling of interests is no longer an option. Instead, preparers would have to analogise to principles within pronouncements currently in issue, and this may include IFRS 3, despite the scope exclusion. The Board noted that this may give rise to different accounting treatment depending on which pronouncements were referred to. For instance, some may look to the conceptual framework and not IFRS 3, due to the scope exclusion.
• The descriptor 'combinations by contract alone without the obtaining of an ownership interest' would be clarified to state 'combinations by contract alone that do not involve any of the combining entities obtaining an ownership interest in the other combining entity (entities)' so as to eliminate any structuring opportunities.
• Clarify that if an entity is a parent in terms of IFRS 3 under such arrangements, then it should apply IAS 27 effective 31 March 2004 consistently with the effective date of IFRS 3.
• Clarify that in terms of IFRS 1, if a parent-subsidiary relationship existed on the date of transition where a 'stapling' transaction had been entered into, then the parent would, on first-time adoption, be required to consolidate the subsidiary.

The Board viewed the above as clarifications of the current requirements, not amendments, and therefore exposure of the above would not be necessary. Furthermore, the Board agreed to communicate these clarifications directly with the respondents who commented on the exposure draft as well as through its publications, including IASB Update, Insight, and posting on the website.

The following are some of the reasons discussed by the Board before agreeing to proceed on the above basis:

• The Board's intention is to eliminate the pooling of interests method of accounting for business combinations that may be achieved by contract alone or involving mutual entities whilst Phase II of the business combinations project is being completed.
• Removing the scope exclusion in IAS 22 would require re-exposure and would be contradictory to the Board's earlier decision to address these issues during the Phase II project.
• Any amendments to current literature would affect the 'stable platform'.